Transport Management & Theory Practices (9)

Management of
Transportation
Seventh Edition
Coyle, Novack, Gibson &
Bardi
© 2011 Cengage Learning
Chapter 9
3PL and Special
Service Providers
1© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.

Introduction
• Outsourcing
– Substituting external specialists for in-house
capabilities
– Relatively common today for activities such as:
• Accounting
• Payroll and tax preparation
• Advertising
• Human resource benefits administration
• Transportation services
– Provided by organizations known as third-party logistics
service providers or 3PLs
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied
2

Introduction
• Choice of a 3PL should be carefully made
– 3PL performance impacts financial and
customer service performance
• Chapter addresses process for selecting 3PL
– Structure of 3PL industry
– Characteristics of 3PL users
– Types of 3PL relationships
– Current and future 3PL industry issues
3

Industry Overview
• Definition of a 3PL
– “an external supplier that performs all or a part of a
company’s logistics functions.”
– Services may include: inventory management,
warehousing, financial services, transport, distribution
– Chapter focuses on transportation services, but,
• Transport services should be integrated with customer’s
other logistics activities
• Transport focused 3PL should be capable of providing
solutions to logistics and supply chain challenges
4

Industry Overview
Types of 3PL Providers
• Most 3PLs have their origin in a specific
activity, such as transport, IT, etc.
• These foundation services provide a basis
for classifying 3PLs
– Transportation based
– Distribution based
– Forwarder based
– Financial based
– Information based
5

Industry Overview
• Transportation based
– Originally transportation carriers
– Developed 3PL subsidiaries in response to expanding
customer requirements
– Services now include transport management, dedicated
contract carriage, and fulfillment center operation
– Example providers (with parent company)
• APL Logistics/Neptune Orient Lines Limited
• UPS Supply Chain Solutions/UPS of North America
6

Industry Overview
• Distribution based
– Originally public or contract warehousing services
– Expanded services into inventory management
and order fulfillment.
– Some have integrated transport services into offerings
– Wide range of market reach, from local to global
– Example providers
• Exel, DSC Logistics, Ozburn-Hessey Logistics
• Caterpillar Logistics Services
7

Industry Overview
• Forwarder based
– Originated from intermediaries such as freight
forwarders, brokers and agents
– Arrange transport-related services for less-than-
volume shipments and for international shipments
• C.H. Robinson Worldwide, Hub Group, Kuehne+Nagel
• Considerable mergers and acquisitions among this group
8

Industry Overview
• Financial based
– Helps customers with monetary issues and
financial flows in the supply chain
• Traditional services include freight rating, freight
payment, freight bill auditing, accounting services
• Expanded services include IT systems for freight
visibility, electronic payment, carrier compliance
reporting, claims management
• Cass Information Systems
• Commercial Traffic Corporation
9

Industry Overview
• Information based
– Services include online freight brokering and cargo
planning, routing, and scheduling
– Also offer online access to transport and
warehouse management systems
• Avoids purchase of licensed software for these services
• Descartes Systems Group, Sterling Commerce,
Transplace
10

Industry Overview
• Alternative 3PL classification scheme
– Asset based providers
• The 3PL owns the equipment used to provide services
– Non-asset based providers
• 3PL arranges for services from other companies that
own equipment
• The 3PL tends to not own equipment (assets)
11

Industry Overview
• Asset based providers
– Examples include Exel, FedEx, UPS, Menlo
– Advantages for user of 3PL services
• 3PL maintains direct control over shipper’s freight
• 3PL has ready access to capacity
• Fewer organizations to work through to resolve
problems
– Disadvantages for user of 3PL service
• Provider may favor using the type of assets it owns,
this may be less then optimal for user
12

Industry Overview
• Non-asset based providers
– Service integrator
• Build customer-tailored solutions from services offered by
transport and logistics service specialists
• Experts in structuring and negotiating contracts
– Popular services include freight management and
brokerage, routing and scheduling shipments,
international freight flow management
– Examples: CEVA Logistics, C.H. Robinson
– Advantages: flexibility, unbiased solutions
13

Industry Overview
3PL Services and Integration
• Wide range of services, from supply chain
design to daily operations
• Within transport, 3PLs provide 4 principal
types of services
– Freight movement
– Freight management
– Intermediary services
– Specialty services
14

Figure 9-1: 3PL Primary Transportation Offerings
15
FREIGHT MOVEMENT
• For hire carriage
• Contract carriage
• Expedited service
• Time definite service
• Intermodal service
FREIGHT MANAGEMENT
• Carrier selection, routing, & scheduling
• Contract compliance
• Performance analysis
• Freight bill auditing and payment
• Transportation management systems
INTERMEDIARY SERVICES
• Surface forwarding
• Air forwarding
• Freight brokerage
• Intermodal marketing
• Shippers associations
SPECIALTY SERVICES
• Dedicated contract carriage
• Drayage
• Pool distribution
• Merge in transit
• Household good movement

Industry Overview
• Intermediary services
– Surface freight forwarder
• Picks up, assembles and consolidates shipments
• Arranges for carriers to transport and deliver to final
destination
• Serve as shippers and carriers. As carriers, they are
liable for loss and damage
– Air freight forwarder (similar to surface forwarder)
• Specializes in high value, time sensitive goods
16

Industry Overview
– Freight brokerage
• Middlemen between shipper and carrier
• Tries to match carrier’s capacity with shipper’s demand
– Intermodal marketing companies
• Consolidators or agents, facilitate intermodal rail service
• Assume no liability, legal shipping arrangement is
between shipper and carrier
– Shippers associations
• Non-profit coops, aggregate member cargo for shipment
as consolidated load
17

Industry Overview
• Specialty services
– Dedicated contract carriage
• 3PL serves as customer’s private fleet
• Customer gains advantage of private fleet without
capitalization, operating and management responsibilities
– Drayage
• Short haul trucking, pick up and delivery of containers
• Typically contracted for by rail or ocean carriers
18

Industry Overview
– Pool distribution
• Description
– Large quantity of freight moved as one shipment in bulk
to central distribution point
– Freight unloaded, sorted by customer, delivered to local
destination
• Competes directly with LTL service offered by LTL
motor carriers
• Potential advantages
– Faster transit time, less handling, lower rates, lower
inventory costs
19

Industry Overview
– Merge in transit
• Unites shipments from multiple suppliers at a merge point
near end customer
• Customer orders of assorted goods assembled at merge
facility for delivery to end customer
• Advantages: lowers total inventory cost, customer avoids
capital cost of warehousing facility
– Household goods movement (HHG or van lines)
• Operations include local agency with warehouse, pick-up
and delivery equipment, centralized dispatch, and specialized
vehicles for long distance transport
20

Industry Overview
• Emerging 3PL capabilities
– Customers desire “one-stop shopping” thus, leading
3PLs developing as integrated service providers
– Customers desire global reach, thus, leading 3PLs
expanding service territories
– Both capabilities require:
• Supply chain network design capabilities
• Process implementation and coordination
• Day-to-day execution
• Strong IT tools and multi-modal capabilities
21

Industry Overview
• Approaches to global integration include:
– Leveraging strengths of express delivery services
• Visibility, door-to-door, high reliability
– Acquisitions and partnerships among 3PLs
– Offering portfolio of transportation, e-commerce
supply chain and business services
• Includes inventory, fulfillment, cold chain solutions,
cross docking, brokerage, freight forwarding
– Strategic investments in transport/distribution
facilities
22

3PL User Overview
• 3PL growth trends
– Spending on 3PL services steadily rising
– In U.S. 3PL providers account for 16% of total
logistics spending in 2008
• Up from 10% in 2002
– 77% of Fortune 500 outsourced some portion of
logistics and supply chain functions in 2008
• Up from 64% in 2005
• Three industries lead use of 3PL services
– Technology, automotive, retail
23

Figure 9-2: U.S. Spending on 3PL Services
24
Source: Armstrong and Associates, Trends in 3PL/Customer Relationships, 2009. Used with permission.
$Billions

or duplicated, or posted to a publicly accessible website, in whole or in part. 25
Table 9-2

3PL User Overview
Reasons for Outsourcing
• Lack of internal expertise
• Supplement internal expertise
• Opportunity to reduce costs, improve
financial performance
• Opportunity to increase resource capacity or
improve asset productivity
26

Table 9-3: Reasons For and Against 3PL
Use
Reasons for Using 3PL
Services
• Opportunity for cost reductions
• Ability to focus on core competencies
• Opportunity to improve customer service
• Improve return on assets
• Increase in inventory turns
• Productivity improvement opportunities
• Imbibe more flexibility into logistics
processes
• Access to emerging technology
• Expansion to unfamiliar markets
• Ability to divert capital investments
Reasons Against Using 3PL
Services
• Logistics is a core competency of company
• Cost reductions would not be experienced
• Control over outsourced function would diminish
• Service level commitments would not be realized
• Company has more expertise than 3PL providers
• Logistics is too important to consider outsourcing
• Outsourcing is not a corporate philosophy
• Global capabilities of 3PL need improvement
• Inability of 3PLs to form meaningful relationships
• Issues related to security of shipments
27
Sources: B.S. Sahay and Ramneesh Mohan, “3PL practices: an Indian perspective, International Journal of Physical Distribution &
Logistics Management, Vol .36, No. 9, 2006; and, Georgia Tech and CapGemini LLC, Eleventh Annual 3PL Study, 2006.

3PL User Overview
Primary Activities Outsourced
• Most relationships with 3PLs are tactical,
meaning 3PLs are used for a specific task
– Transportation is the most often used service
– Customs clearing, freight forwarding and
shipment consolidation also widely used
• About 18% of 3PL relationships are strategic
– 3PLs fully manage customer’s supply chain
• However, many users look to 3PLs for help
in integrating global service capabilities
28

3PL User Overview
Results Achieved
• 3PL users satisfied with outsourcing results
– Logistics cost reductions in 12%-15% range
– Fixed logistics assets reduced 20% or more
– Order cycle time reductions of 20%-30%
– 3PLs provide more flexibility to fluctuating demand
– 3PLs help customers increase service reliability
• But, most 3PL relationships have some problems
– Most common: unrealized service-levels or cost
reductions, lack of continuous improvement
29

Figure 9-3: 3PL Relationship Evaluation
Source: Georgia Tech and Capemini LLC, The State of Logistics Outsourcing: 13th Annual 3PL Study, 2008, Fig. 4, p. 11 Copyright © 2008
C. John Langley, Jr., Ph.D, and Capgemini U.S. LLC. All rights reserved. Reprinted by permission.
PercentofRespondents
30

Establishing and Managing 3PL Relationships
• Six step process for establishing 3PL relationship
• Step 1: Perform strategic assessment
– Perform a logistics/supply chain audit
• Identifies current state, needs, and strategy alignment
– Info to be collected in audit includes
• Goals/objectives at corporate, division, supply chain levels
• Requirements of customers, suppliers, key logistics providers
• ID/analyze strategic environmental factors, industry trends
• Profile current logistics network, firm’s positioning
• Benchmark logistics costs and key performance indicators
• Gap analysis between current and desired performance
31

• Step 2: Decision to form relationship
– Which service provider’s capabilities are needed?
• Does the company appear to have core competency
(expertise, strategic fit, and ability to invest)?
– Lambert, Emmelhainz, and Gardner Partnership Model
• Key parts: drivers and facilitators of a relationship
• Drivers: the compelling reasons to partner
– Synergy from the partnership that cannot otherwise be attained
• Facilitators: corporate environmental factors that enhance
partnership development and growth
– Compatible cultures, mgmt. philosophy, relationship commitment
33

• Step 3: Evaluate alternatives
– Guiding principles
• If neither drivers or facilitators are present, then the
relationship should be transactional or arm’s length
• If all parties in the relationship share common drivers
and facilitating factors are present, then a more
structured, formal relationship is justified
– Evaluation should include comparison of firm’s
needs with capabilities of potential 3PL partner
– Evaluation should include cross-functional
perspectives
34

• Step 4: Select partners
– Step 3 identifies 3PLs that have credentials to be
partners
– Next, given the strategic nature of the pending
relationship, the firm’s executives should interact
professionally with candidate 3PLs
– The final outcome should be
• Consensus on “best fit” 3PL
• Consistent understanding of the decision made
• Consistent expectation of what to expect from the 3PL
35

• Step 5: Structure operating model
– Structure refers to activities, processes, and
priorities of the relationship
– Components of the operating model include
• Joint planning processes and operating controls
• Communication protocols
• Risk/reward sharing
• Trust and commitment
• Contract style
• Scope of the relationship
• Financial investment
36

• Step 6: Implementation and continuous
improvement
– Implementation time varies depending on scope
and complexity of relationship
– Continuous improvement process
• Aim for breakthrough improvements that strengthen the
market position of the partners
• Tools include
– Customer value research
– Flowcharting and statistical process control
– Activity-based costing, benchmarking, process reengineering
37

• Keys to successful relationships
– Both organizations invest time and money in
development and sustainment
– Information sharing
– Culture of trust
– Openness to new ideas and methods
– Collaboration on a regular basis
– Team approach to problem solving
– Leveraging of each partner’s capabilities
38

Strategic Challenges for 3PL Users
Service Requirements
• Initial questions prior to forming relationship
– What are the types of services required?
– Tactical or strategic approach to attaining services?
• Tactical: outsource individual services as needed
– Relationship is transactional, collaboration is tactical
– Wal-Mart’s use of Greatwide Transportation for refrigerated
product delivery rather than own fleet is an example
• Strategic: establish extensive set of integrated service
capabilities with 3PL
– High consequences, 3PL heavily impacts service performance
– Example: Goodyear uses Exel for transportation load planning,
private fleet operations and order fulfillment
39

Coordination Role
• Where should the role of coordinating key
logistics activities reside?
– Resides internally if firm does not outsource
– Resides internally if firm outsources tactically,
largely to reduce cost of key activities, such as
transportation
• Firm uses 3PLs specializing in limited number of
services, i.e. logistics service providers
40

Coordination Role
– Coordination role shared with 3PL if firm
outsources to achieve value added services
• Firm uses 3PL integrated service providers
– Coordination role largely lies with service
provider if they have lead responsibility for
regional supply chain integration
• Provider known as lead logistics provider or 4PL
– Coordination totally assumed by advance
service providers (global integrators)
41

Figure 9-7: 3PL Coordination Capabilities
Limited
InsourcingInsourcing
Basic Services
(Logistics Service Providers)
Value-Added Services
(Third Party Logistics)
Lead Logistics
(4PL)
Advanced
Services
Global Supply Chain Integrators
Pan-Regional Integrators
Shared across activities
and locations
• Project Management
• Single Point of Contact
• Enhanced Capabilities
• Broader Service Offerings
• Speed of Implementation
• Knowledge Transfer
• Shared Risk & Reward
• Comprehensive Solution
• Resident Client
Knowledge
• Focused Cost
Reduction
3PL Coordination RoleKey Attributes
None
Source: Georgia Tech and Capgemini LLC, The State of Logistics Outsourcing: 10th
Annual 3PL Study, 2005. Copyright © 2005 C. John Langley,
Jr., Ph.D., and Capgemini U.S. LLC. All rights reserved. Reprinted by permission.

Technology Integration
• State of the art IT: critical capability for 3PLs.
Necessary for
– Advanced communications
– Shipment visibility and event management
– Management of daily operations
• Gap between expectations and 3PL capabilities
– Lack of sufficient shipment visibility
– Lack of 3PL internal systems integration
– Impedes seamless info flow and activity integration
43

Goal Cohesion
• Incongruent goals create potential conflicts
• Keys to creation of consistent goals
– Strong personal relationships at both operating
and executive levels
– Contracts with detailed requirements and
performance verification capabilities
– Attainable performance targets
– Monitoring of key performance indicators
44

Supply Chain Security
• Principal concern is theft. Keys for avoiding:
– Providing better physical security for goods
– Develop security procedures collaboratively with
customers
– Provide proactive reports and alerts when shipments
deviate from plan
– Monitor key freight transfer points, avoid high risk
transport routes, i.e., Gulf of Aden
– Obtain C-TPAT, and other certifications
45

Future Issues and Challenges
• Economic forces
– Volatile fuel costs
– Economic instability
– Shifting demand and production patterns
• Increasing capability expectations
– Services integration
– Managing worldwide services
– Rising demand for strategic capabilities
46

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